Exercise 7-8 Innova uses 1,040 units of the component IMC2 every month to manufa

Question

Exercise 7-8 Innova uses 1,040 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows. Direct materials $61.17 Direct labor 43.50 Overhead 126.50 Total $231.17 Overhead costs include variable material handling costs of $7.40, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 60% variable costs and 40% fixed costs. A vendor has offered to supply the IMC2 component at a price of $200 per unit. (a) Prepare the incremental analysis for the decision to make or buy IMC2. Make IMC2 (per unit) Buy IMC2 (per unit) Net Income Increase (Decrease) Direct material $ $ $ Direct labor Material handling Variable overhead Purchase price Total unit cost $ $ $ Should Innova purchase the component from the outside vendor if Innova’s capacity remains idle?

Explanation / Answer

(a) Prepare the incremental analysis for the decision to make or buy IMC2.

b) No, Innova should not purchase the component from the outside vendor if innova's capacity remains idle.

Make Buy Net income increase (decrease) Direct material 63616.80 63616.80 Direct labour 45240 45240 Material handling 7696 7696 Variable overhead 74318.40 74318.40 Purchase cost 208000 -208000 Total relevant cost 190871.20 208000 -17128.80

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